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Comment by jejeyyy77 | Hacker News Reader

This is wrong on a few levels.

1) as someone who has been on the ground as well, I’ve lost a few offers because I was worried about over paying. On multiple occasions, after seeing what it sold for we thought “damn, we woulda paid another $25K on top to get it had we known.”

2) Canadian banks has a very conservative “stress test” for securing mortgages. This includes qualifying at much higher rates then is being offered. Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

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That “damn we would have paid X more” is exactly what it’s designed to encourage - we’re not good at calculating large numbers so once you’ve “made the decision” to pay $500k making a decision to pay $50k more is relatively easy (and seems like nothing).

In a normal Dutch auction style situation you’ll pay $1 more than the second highest bidder, which is a bit more fair.

I think you mean a reverse Dutch action. Which is almost a regular auction.

In a Dutch auction (regular dutch auction. Not reverse.) there is no second bidder. The price starts too high and drops until the first bidder to decide the price is low enough (as it drops) buys.

This part:

  Canadian banks has a very conservative “stress test” for securing mortgages.

... is excellent. More places need it.

Please stop gambling on housing as an asset class.

The middle class doesn't do it in France, Germany, or Japan. In those places, housing prices are kept _fair_ through clear, transparent planning and a blend of free market and regulation. What the hell is wrong with US/UK/AUS/NZ that allows insane leverage to middle class house buyers that drives up the price of houses? It's all silly to me. (I'm less familiar with how much CAN allows middle class people to gamble on housing.)

> Canadian banks has a very conservative “stress test” ... Therefore it isn’t possible to “stretch yourself beyond any reasonable limits”

“stretch yourself beyond any reasonable limits” means that you may not be able to pay your mortgage, it doesn't mean the bank won't offer it to you.

The bank won't offer if you can't pay, at least in the US these days. But we have 30 year fixed mortgages, I think Canada is shorter

The norm in Canada is 30 year term, with a variable rate. It's the second part that can really get you...

30 years hasn't been possible in Canada for several years now (thankfully).

What is normal? It's hard for middle class people to afford normal housing stock in highly advanced countries without 30 years of amortizing debt. Yes, I understand that some countries force you to chain bullet mortgages over ~30 years to achieve a similar effect.

Why is that a good thing?

That makes sense, I would be terrified putting 40% of my pre-tax income towards a mortgage with a variable rate

I think you're conflating mortgage term (which is typically 5 years fixed or variable in Canada) and amortization. The latter can go up to 25 years for CMHC-insured loans at the time.

In a sense you are both right, you just don't set the threshold at the same place.

The bank will look at how much you earn and how much you owe and say "We can pre-approve you for $X at Y%". They consider that you can pay that rate and they are most likely right.

Now if you do take $X, you have effectively leveraged your entire earnings, which for most people is a pretty bad idea because stuff happens and you can end up with a mortgage you can't pay because turns out you also want a car.

That being said (at least in Canada), your broker won't really let you take the full bank offers, or at least they don't expect you to do it.

In the US, most lenders will do between 36 and 43% of your earnings pre-tax. Assuming you pay another 25 to 30 in taxes, this should be half of your disposable income, leaving 50% or cars food Etc.

For a $5,000 mortgage, that's a $5,000 a month buffer

Um. Look at your numbers again. Assuming your 36-43% is correct (I haven't shopped a mortgage in almost 15 years), that puts the combined total at 61-73%. Also, that combined tax rate feels really low for anyone with the income to effectively bid in this current market. Add up SS and Medicare taxes, federal income taxes, state income taxes, and sales taxes and 30% feels like a floor rather than a ceiling.

EXAMPLE: 120k income breakdown (10k/month):

Federal actual rate 16.5% (24% marginal)

CA State actual rate 6.4% (9.3% marginal)

Medicare rate 1.45%

OSDI rate 6.2 %

CA SDI rate 1.0%

Total:31.55% total before tax deductions and tax shelters

If your mortgage is ~40%, you have ~30% left over.

Per month, this is 4,000 for a mortgage, 3,000 taxes, and 3,000 remainder.

A 4,000/month mortgage covers a 800k loan on $1 million dollar home.

You don't get a lot of house in the bay area for 1 million, So if you are single earning this much, you are looking at condos.

If have two similar earners, you just double everything. E.g. 2 million dollar house with $6,000 per month remaining income.

You are not going to get an 800,000 loan with a repayment of $4,000/mo on a 120K income. For one, that's in jumbo loan territory with more onerous requirements for DTI above and beyond 20% down payment.

You haven't factored in property taxes, home insurance, or anything. Putting these numbers into a calculator, your monthly loan payment is going to be closer to $5,400 a month.

You're taking home $6,800 a month.

You're not living on $1,400 a month in the Bay Area.

No bank is giving you this loan.

Seems like you're not talking about over paying, but rather out-bidding someone. It seems like maybe a first offer should establish a baseline price, and everything subsequent should be transparent, or perhaps have a blind expiry on it, so you'd know if your offer was declined before an offer has been accepted

It’s still quite possible to stretch yourself. Variable mortgages are common and interest rates are going up at a rapid clip. It’s possible for them to rise further than the stress test numbers. Refinancing in five years may be painful if you got a mortgage at 1.5%, stress tested for 3.5% and refinanced at 5%.

Stress test currently means you need to qualify at 5-6% if you have 20% down.

If you are putting less than 20% then the stress test is even higher.

I doubt we will see 5-6% interest rates in the next 5 years.

Tell that to the 5.1% rate a friend of mine just got on a new home purchase with >20% downpayment. I dunno if rates are a lot better in Canada or something, but we're already in 5-6% range in the US for some properties. They had excellent credit too.

Interest rates are still at 2.5% in Canada. Still a ways off from 5-6%.

Rates are better in Canada. 2.3% is within the norm.

US mortgages are 30yr fixed. In Canada you cannot get a fixed rate for that long and 5 years is the norm - everyone here effectively has an ARM. This is why rates are almost always higher in the US.

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